What you need to know to understand financial aid offers

Compare the sources, lengths of financial aid offers to determine which school is most affordable

Chris Granger / Newhouse News ServiceJoyce and Louis Colin, bottom left and top right, will be sending their first child, Jade, center, to college. Their other children, Jazmine, top left, and Louis Jr., bottom right, will be going soon too.

In the coming weeks, many colleges will start sending letters to students telling them what financial aid packages will be available to them. When the letters arrive, families will learn which college's education they will be able to afford.

"This is the first time they have all the cards on the table and know what money (the school) can provide you with and what you'll be responsible for," said Martha Holler, spokeswoman for Sallie Mae, a major federal student loan lender.

The award letter will list elements of the financial aid package, and a family can accept or decline each item, she said. It can be difficult to make an apples-to-apples comparison of each financial aid award letter.

Sallie Mae offers a free Online Award Analyzer at www.CollegeAnswer.com/Award, part of the "going-to-college" resource. The analyzer will evaluate the award packages side by side and estimate what your monthly student loan payments would be after graduation.

In each letter, the expected family contribution -- the amount the student's family has to put up -- will be the same, because that is based on federal guidelines that take into account the family income.

One difference between offers is whether the aid is in the form of a one-time or a renewable grant or scholarship. Scholarships and grant awards can be based on academics, athletics participation or financial need. That money doesn't have to be repaid.

Next to consider is borrowing. In the hierarchy of loans, the first to consider is the Perkins loan offered to students who have demonstrated financial need. Such loans are federal loans administered by the school and don't require payments while the student is in school. They have a fixed interest rate of 5 percent.

Any student can qualify for a Stafford loan. The difference is whether it is subsidized or unsubsidized. A subsidized loan means the federal government will make the interest payments while the student is in school. Again, the family must demonstrate financial need to get a subsidized Stafford loan.

An unsubsidized Stafford loan requires the student -- or more likely the family -- to make interest payments on the loan during the student's school tenure. Those interest payments can be deferred until after graduation, but the interest will be added to the principal.

Both types of Stafford loans have very low limits compared with the current cost of
college tuition. Freshmen can borrow as much as $3,500, and sophomores can get $4,500. In the junior and senior years of college, a student can borrow a maximum of $5,500.

The next layer of loans is PLUS loans taken out by graduate students or parents of undergraduates. The key difference is that these loans allow a family to borrow as much as the cost of attendance, minus any other financial aid the student has received, Holler said. PLUS loans have a fixed interest rate of 8.5 percent.

If a family can't afford to bet the farm on one child's education, the student can seek
other borrowing alternatives in the private loan or alternative loan market. These are more like consumer loans, and interest rates are based on the borrower's creditworthiness, Holler said.

There's no federally set cap on the interest rate. Sallie Mae charges LIBOR, or the London InterBank Offered Rate, plus 9.5 percent. So the current rate is 12.5 percent.

For a family, paying for college can create major debt that is akin to buying a house in four or five years. It's an expense that should be carefully considered in relation to a family's other major expenses, including saving for retirement, paying off a mortgage and educating other children.

On average, tuition at a private four-year college cost $23,712 last year, up 6.3 percent from 2006. Public four-year colleges had an average tuition of $6,185, up 6.6 percent in the same period.

Even with tuition paid through scholarships or grants, there are a slew of other school expenses including meals, books that can cost as much as $900 per semester, monthly fraternity or sorority house fees, plus travel from campus to home.

Pay close attention to the deadlines set by each school for the student to accept or decline the offer. If your award letter calls for the family to pay more than savings and working income can bear, it's worthwhile to contact the school and see whether it can help a bit more.

"Remember, you've been accepted at this school and they want you to enroll there," Holler said. "So if you have some extenuating circumstances, they want to know about it so they can work with you on your financial aid award."Paying for college
The most common sources for financial aid are:
-- Grants, money that does not have to be repaid, including: federal Pell Grant, Federal Supplemental Educational Opportunity Grant (FSEOG), ACG, National SMART Grant, grants from your college and state-sponsored grants.
-- Work-study, which is money earned by working on-campus or off-campus.
-- Scholarships, money offered by the college that does not have to be repaid.
-- Loans, or borrowed money that must be repaid, including: Federal Stafford Loan (subsidized and unsubsidized); federal PLUS loans, Graduate PLUS loans, federal Perkins loans, state loan programs and private loan programs.
Source: Sallie Mae's www.CollegeAnswer.com